Financial Planning in Your 20s and 30s

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1 Financial Planning in Your 20s and 30s Financial planning varies throughout the different stages of life. Older people are often focused on planning for a comfortable retirement, while younger people often want to plan for multiple situations: immediate goals, like a car or holiday; foreseeable future events such as home ownership; and later goals such as retirement. To ensure that you reach all your goals, it s important to start early and follow a financial plan. In this article, you ll find the information you need to start planning your financial future. Strategies for financial planning Everyone needs at least some level of financial planning. Financial planning is about creating a plan to help you get where you want to go. It s about setting realistic goals and targets and then working out the best way to reach them. At this stage in life, your financial plan should involve three core strategies: 1. Managing debt to achieve freedom and flexibility Overview What you need to know about financial planning in your 20s and 30s. Strategies for financial planning Setting goals Developing a plan Tips for staying on track Insurance Saving for your wants and dreams Resources 2. Saving for financial security in the immediate future 3. Investing for long-term future growth You may shift your focus from one strategy to another depending on your current financial situation. For instance, in general, if you have credit card debt, you should focus on paying that off before you do anything else. However, if you don t have any emergency savings or haven t started saving anything for retirement, it may be wise to work on saving some money while you pay down your debts. Then, once your credit card debt is paid off, you can start saving and investing more money. It is important to make a good plan and start following it. Setting goals In setting up your financial targets, your first step is to prioritize the goals according to importance. Some experts advise assigning three categories: needs, wants, and dreams. eeds are the non-negotiable basics; your monthly bills including rent, mortgage and utilities, an emergency fund and existing debt such as student loans and credit cards. This category also includes maintaining appropriate insurance. Wants are goals that are important but that don t need to be taken care of by a set time such as holidays, a car or a home improvement.

2 Dreams are the icing on the cake or a little further off in time for example, a holiday home, a special car or early retirement. You may find it helpful to make a list for each category. This will help you get a better overall picture of your financial situation so that you can start putting together a plan to meet your goals. Use your lists to come up with a few financial goals. Your goals might include paying off credit card debt and student loans, building an emergency fund, and saving for a deposit on a house. Don t forget to include short-term goals, too, such as saving for a holiday or making an extra contribution to your mortgage payment. Developing a plan Now that you have a clear idea of where you want to go, you can begin to work out how to get there. As a younger person, you re in a great position to succeed in reaching your financial goals. You have lots of time to save and invest for your future, but you ll only be successful if you develop a realistic plan which you can stick to. Financial plans are easier to make than they are to follow. It s tempting to ignore a budget or your long-term goals when there s something you really want or need at the moment. However, if you develop a financial plan that s realistic and easy to follow, you ll be more likely to stick with it. The needs category is the first one to address in your financial plan. The first 60% of your pay will probably go toward essentials like food, housing, clothing, and taxes. Once you take care of these basics, you can focus on the three steps outlined below: managing debt, accumulating savings, and investing for the future. 1. Managing your existing debt Reducing your unsecured debt should be a priority in any financial plan. Paying off your debt is more important than setting aside savings because debt typically grows at a rate far higher than the growth rate of savings. Get your credit cards under control. Try to pay the full balance on each of your credit cards each month. If you can t do that, focus on never missing a payment and paying more than the minimum balance each month. You should also work towards paying off your highest interest cards first. Even if you can only afford to pay a little more than the minimum balance, you ll still be making a big difference in how long it will take you to pay off the total debt. Pay bills straight away. To avoid late fees, open mail as soon as it arrives. Even better, pay your bills online or by direct debit. Most companies will allow you to set up direct debit payments.

3 Be patient. Depending on how much debt you have, paying it off can take a long time. Try to remember that every single pound you put toward getting out of debt is making a difference in your total financial picture now and in the future. 2. Saving for financial security Financial advisers recommend that everyone sets up an emergency fund to help with an unforeseeable financial disaster, such as job loss, illness or anything else that could pull the rug out from under you. Experts recommend that people save enough to cover at least three months worth of expenses. You can set an emergency savings goal by looking at your fixed monthly expenses, such as your mortgage or rent and other necessary expenses, such as utilities, food, and gas. Multiply this figure by three and you ll know how much you need to save. Don t feel overwhelmed by your savings goal, you don t have to build an emergency fund overnight. Just keep adding to it as often as you can. You may not be able to set aside this money all at once, especially if you re focused on paying off debt first. But building an emergency account should be your next goal, and remember that even small contributions to a savings account will add up. Put your emergency savings into a low-risk, accessible account. Once you have at least a three-month stash set aside, forget about it; it s only there in case of emergency and shouldn t be used for anything else. 3. Saving and investing for long-term goals As a rule of thumb, many advisers recommend that those in their 20s and 30s save at least 10 percent of their income, increasing to 15 percent in their 40s. It may come as a shock to learn that you will need about 400,000 to retire comfortably. However, this is not the amount you need to save but the amount your fund needs to be worth when you retire. Due to the way interest works, the earlier you start saving the easier it will be! You can save through your company pension scheme or through a private scheme or both. Company pension schemes allow you to deduct a portion of your salary before tax and invest it and often the company will match your contributions. Personal pension schemes benefit from tax relief and have other advantages. Many people also choose to invest in property or other such assets. It is wise to take professional advice on the best long-term savings option for you. Try visiting to find an independent financial advisor.

4 Tips for staying on track A financial plan only works if you stick to it. The following tips can help you stay on track: Make it automatic. When it comes to saving, out of sight, out of mind is a good rule to follow. If money that s earmarked for savings goes directly from your salary into an account that s not easily accessible, it ll be much harder to spend it. You can ask your employer to pay your salary into two accounts or you can set up an automatic payment into you r savings account on the day you get paid. Also, to make sure your bills are paid on time, you might arrange for your bills to be paid by direct debit. Make the most of your employer s help. Maximize your savings by signing up for tax-advantaged plans at work such as Share Incentive Plans, and Save As You Earn schemes. Put it in writing. Keep a list of your goals and a written plan that you can refer to. This will help you stay focused. Consider setting up separate savings accounts for specific goals. You might consider having separate savings accounts for goals such as a holiday, car, or deposit on a house. That way, you ll be able to see the progress you re making toward each goal. You may find it helpful to set up savings accounts that aren t linked to your main current account. This will make it harder to access your savings. Put found money into savings. Found money might be a bonus, the amount of a pay rise, or monetary gifts you receive. Don t treat these windfalls as an invitation to spend. Try to treat them as an invitation to save. Whenever you get a pay rise, increase your savings account contributions. Try to put at least half of your bonus or any cash gifts into savings. Protect against future debt. Once you ve figured out what to save for and how to reach those financial goals, you ll need to keep yourself on track to get where you want to go. That means controlling your spending to avoid being sidetracked by additional unnecessary debt. Prepare a budget, or spending plan, as some people prefer to call it, so you know where your money is going. Track all of your spending for two weeks. Then, look back through your spending and see whether your actual spending reflects your financial priorities. If you re like most people, you ll find lots of places where you could cut back. Insurance Insurance is essential to your financial plan. You probably already have some insurance, such as car or home insurance. However, other types of insurance protect against the risk of huge expenses if something unexpected happens.

5 Life insurance is important if someone depends on you financially. It protects your family from the loss of your income if you were to die. Look for term life insurance, which is quite inexpensive at your age, and buy enough coverage to pay for funeral expenses and your family s living expenses for three to five years. Critical illness insurance provides coverage if you become ill during your working years. Compare what each policy pays and what illnesses they cover. Health insurance to cover the costs of any private health needs that may come up is also useful in some cases. If health insurance is a benefit offered through work, carefully evaluate your choices to find the plan that best suits your needs. Other types of insurance to consider, depending on your circumstances, are the following: Particular risks can also be covered by insurance, such as a personal items. If you have any particularly valuable or important belongings, such as expensive electronics, antiques, musical instruments, or jewellery, are you comfortable living with the risk of losing them? Or would you rather transfer that financial risk to an insurance company? Saving for your wants and dreams There s more to life than the necessities, and you should remember that in your financial planning. It s important to plan for the things that bring you contentment, happiness and fun, whether it s the computer set up of your dreams, a beautiful wedding, or a much-needed holiday. Set aside money for these goals, just as you re setting it aside for necessities like retirement. Otherwise, you ll be tempted to put these expenses on your credit card or take on other forms of debt. The trick is to be intentional about saving for what you want. In your 20s and 30s, it s likely that you re not able to set aside money every month for everything; retirement, holidays, home improvements etc. It is fine to cut back in some areas occasionally and to focus on others. For example, if you re planning a holiday work out how much it will cost, and cut back on your savings plan for the amount of time it will take you to save for the holiday. Just make sure you to set a date to get back to your regular savings programme.

6 Financial planning and sticking to the plan may seem daunting, but it s important to start when you re young. The sooner you start, the more time your money has to grow. Even if you can only afford to set aside a little bit at a time at first, you ll still be having a huge impact on your future, and your family s. Resources Independent comparison website: Consumer advice: Citizens Information Ireland: Financial Advisor search website: Government advice on pensions: The Pensions Board Ireland: Written with the help of Jonathan Hefner, a licenced psychologist who specialises in financial and legal counselling in Minnesota. He is a manager of financial and legal services at Ceridian. 2006, 2007 Ceridian Corporation. All rights reserved.